Marsh drops fees labeled `payoffs' in suit

Insurance broker reacts to Spitzer's allegations

October 16, 2004|By BLOOMBERG NEWS

NEW YORK -- Marsh & McLennan Cos. Inc., the world's largest insurance broker, said yesterday that it will no longer seek fees from insurers after a lawsuit from New York Attorney General Eliot Spitzer called them "payoffs," driving the company's shares down as much as 47 percent.

The move is expected to cost Marsh $485 million in fees, or more than a quarter of its profit forecast for next year, according to Jonathan B. Balkind, an analyst with Fox-Pitt Kelton Inc. in New York.

Spitzer's suit puts pressure on Jeffrey W. Greenberg, 53, to step down as Marsh's chief executive and will probably trigger similar concessions at other brokers, said Nicholas Xie, an analyst at PNC Advisors.

Greenberg said in a statement yesterday that the company is "greatly disturbed by the allegations of wrongdoing" in Spitzer's suit. "We take them very seriously and we are conducting a thorough investigation," he said.

Marsh's stock dropped $5.65, or 16 percent, to close at $29.20. That follows a share price plunge of 25 percent Thursday. Yesterday, Moody's Investors Service lowered its outlook on Marsh's A2 senior debt rating to negative from stable.

Spitzer's suit alleged the New York company took advantage of unsuspecting clients by seeking so-called contingent commissions from insurers such as American International Group Inc. in exchange for throwing business their way.

AIG, led by Jeffrey Greenberg's father, Maurice R. "Hank" Greenberg, said yesterday that the New York firm is likely to stop paying the fees, which also are called placement service agreements.

"It's likely that AIG will no longer issue a PSA, but pay a straight commission and make certain that the commission is disclosed to the insured," Hank Greenberg, 79, said in a conference call. American International shares declined $2.15 to close at $57.85. The stock has lost almost $25 billion in market value in the past two days.

Marsh and competitors such as Aon Corp. of Chicago and Willis Group Holdings Ltd. of London are typically paid from the premiums charged to their clients, the companies that use them to find insurance coverage.

At issue in the Spitzer probe are the additional contingent commissions they take from insurers -- fees that are based on the volume and profitability of the business they steer to those insurers.

Spitzer alleged the practice of kickbacks and bid rigging is pervasive. The New York attorney general, who has helped wrest $4.3 billion from mutual-fund and securities firms and executives, said his latest probe taints "virtually every line of insurance."

Spitzer's suit says Marsh was so intent on winning fees it devised a phony bidding system to make customers believe insurers were competing for business. His suit said AIG, ACE Ltd., Hartford Financial Services Group Inc. of Connecticut, and Munich Re, the German insurer, were participants in the "bid rigging," though none of those companies are named as defendants.

"It looks again like it isn't a question of a few bad apples, but a bad barrel," said John C. Bogle Sr., founder of the Vanguard Group, the No. 2 mutual fund manager. "We're seeing this over and over again."

Patricia Abrams, vice president of ACE, a Bermuda-based insurance giant, pleaded guilty yesterday to participating in bid rigging involving Marsh. On Thursday, two AIG executives, the world's largest insurer, pleaded guilty to criminal charges related to bid rigging. Spitzer has promised more suits and arrests.